Weekly Forex Currency Review 26-07-2013

There has been greater doubts whether the Federal Reserve will look to reduce bond purchases at the September meeting and this will be significant in curbing immediate dollar demand. The key message is that all the major central banks elsewhere will look to maintain very loose monetary policies which will provide significant dollar protection.

Key events for the forthcoming week

Market analysis

Dollar:

There will be further short-term uncertainty surrounding the US outlook with a mixed set of economic releases. Federal Reserve policy will remain extremely important in the short-term with the Fed meeting next week. There has been a more dovish tone and the dollar will be vulnerable if there is any move away from Fed tapering later this year.  The US currency will also be vulnerable to further position adjustment as long positions are scaled back. The underlying fundamentals should still provide important US currency support over the next few months, especially with very important global growth reservations.

The dollar was unable to make any headway during the week and eventually declined to five-week lows on a trade-weighted basis with all-round losses against major pairs.
 
The latest US existing home sales data was slightly weaker than expected with a decline to an annualised rate of 5.08mn for June from a revised 5.14mn previously. The data continued to suggest a gradual underlying improvement in conditions, but with some unease that higher yields were dampening activity.

The flash PMI manufacturing data rose to 53.2 for July from 51.9 previously. The US new-home sales data was stronger than expected with an annualised rate of 497,000 from a revised 459,000 previously.  

The headline US durable goods orders data was stronger than expected with a 4.2% gain for June from a revised 3.7% advance previously. As was the case last month, the improvement was driven to a large extent by aircraft orders and core orders were unchanged. Elsewhere, initial jobless claims rose slightly to 343,000 from 336,000 previously which suggested little change in the labour market.

The dollar failed to sustain an initial advance following the US data releases during the week even with an increase in US Treasury yields as benchmark 10-year rates briefly moved above 2.65%.

Later in the US session on Thursday, there was an article from Wall Street Journal Fed watcher Hilsenrath that the Federal Reserve would keep policy on hold at next week’s policy meeting. More importantly, there were also suggestions that there would be a revision to forward guidance with a potentially more dovish stance and a new lower inflation band and higher unemployment hurdle for increasing interest rates.  These comments weakened the dollar sharply with the Euro pushing to highs near 1.33 as the dollar dipped to five-week lows

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There will be grater optimism surrounding the Euro-zone outlook following the stronger than expected PMI surveys which suggests that there could be GDP expansion for the third quarter. There will also be greater optimism surrounding Spain, but the overall peripheral outlook is still bleak, especially given very high unemployment. The ECB is likely to leave monetary policy on hold in the short-term which will tend to underpin the Euro. There will still be medium-term pressure for a more aggressive policy stance. Political tensions will also increase ahead of the September German election. Overall, despite a firm initial tone, the Euro will struggle to sustain significant gains.

The Euro was able to gain ground and pushed to five-week highs above 1.3250 against the dollar as confidence in the Euro-zone economy improved.  

The Euro-zone manufacturing PMI index moved above the 50 level for the first time for over two years. There was also a stronger reading for the services sector, supported by a jump in the German sector. The data was significant in boosting confidence towards the Euro-zone economy with hopes that it could record positive GDP data for the third quarter. In this context, there were also expectations that the ECB would hold back on any further monetary measures at the August meeting

The German IFO index was broadly in line with expectations as it advanced for the third successive month to 106.2 for July from 105.9 previously. Given significant gains for the PMI index released on Wednesday, there was some disappointment that the data was not stronger. The latest Euro-zone monetary data was weaker than expected with a slowdown in money supply growth to 2.3% from 2.9% and there was an annual decline in private loans for the thirteenth successive month at -1.6%.

Confidence surrounding the Spanish economy remained stronger with second-quarter unemployment falling to 26.3% from 27.2%, maintaining the firm data tone.  Markets continued to assume that there would be no action by the ECB at next week’s policy meeting. The IMF, however, did call for further central bank rate cuts to be considered with the imposition of negative deposit rates.

Yen:

The LDP has secured a comfortable Upper-House majority which will maintain political momentum behind the aggressive policy stance to combat deflation. The Bank of Japan will maintain a very loose policy in the short-term which will limit any underlying yen support. Increased confidence in the Euro-zone outlook would increase the potential for capital outflows from Japan into Euro-zone and also US bond markets. The yen could still gain support if there is a sustained deterioration in risk conditions, but further deterioration in Asia would also maintain pressure for a competitive yen.

The dollar was unable to make any impression on levels above 101 against the yen during the week and was generally weaker with a slide below 99.

There were expectations that Prime Minister Abe would maintain an aggressive policy of monetary and fiscal expansion following his stronger political position and Upper-House election victory. There were still expectations that this would weaken the yen in the longer term. These expectations were countered by speculation that much of the potential impact had already been priced in

The latest trade data recorded a lower seasonally-adjusted deficit at JPY0.60trn from a revised JPY0.78trn previously. There was a slowdown in annual export growth to 7.4% from 10.1% which will maintain some concerns surrounding the Asian economic outlook in particular and will maintain pressure for a competitive yen.

The latest capital-account (data recorded) net Japanese flows into overseas assets of JPY549bn in the latest week from JPY1105bn the previous month and the underlying flows will maintain expectations of a weaker yen. Reports of a potentially more dovish Fed tone triggered renewed losses as US yield support weakened again.

The latest inflation data was slightly stronger than expected with national core prices rising 0.4% in the year to June which suggested that deflation may be easing slightly, although much of the gain reflected yen losses rather than structural factors. After initially weakening, the yen regained some ground as the dollar dipped to lows below 98.70. Any further evidence of rising prices would increase speculation that the Bank of Japan would not need to be as aggressive on monetary policy.

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There will be greater economic confidence following the second-quarter GDP data.  A significant improvement has, however, been priced in which will limit the potential for further Sterling gains. The Bank of England is also likely to maintain an expansionary policy and will look to contain any increase in bond yields through aggressive forward guidance.  The UK will also maintain underlying balance of payments vulnerability, especially if there is a sustained deterioration in global risk appetite with little scope for strong Sterling gains.

Sterling held a firm tone during the week, although a weaker dollar was the main catalyst for further gains against the US currency and a peak above 1.54. Sterling overall was little changed against the Euro.
 
The latest BBA mortgage lending was slightly weaker than expected with an increase to 37,300 for June from 36,300 previously. This was, however, the highest figure since February 2012 and maintained the positive run of housing-sector releases. The latest BCC survey reported exports at a six-year high.

Sterling held a firm tone ahead of key weekly data on expectations of a robust second-quarter GDP release. In the event, provisional growth of 0.6% from 0.3% previously was in line with consensus expectations. This disappointed more bullish market elements which had expected an even stronger release and Sterling was vulnerable to significant profit taking following the release.

There were also expectations that the Bank of England would maintain an aggressive policy of monetary expansion to help sustain stronger growth in the medium term

Swiss franc:

The franc remains overvalued from a medium-term perspective and the National Bank will continue to resist any near-term franc gains with the 1.20 minimum level defended strongly. There will also be scope for longer-term capital outflows from the Swiss currency, especially if global conditions normalise. Overall, the franc is unlikely to make further significant headway in the short-term.

The dollar hit resistance above 0.94 during the week and was subjected to renewed selling pressure later in the week with lows below 0.93. Despite a robust tone against the dollar, the Euro lost ground against the Swiss currency with a dip below 1.2350.

The National Bank continued to claim that the franc was overvalued by around 11% on a trade-weighted index compared with around 10% in May. The over-valuation will reinforce the bank’s determination to prevent any fresh currency appreciation.

The franc’s resilience suggests there may still be some residual demand, supported by expectations that central banks elsewhere will maintain a very loose monetary policy, especially after the latest reported comments surrounding Federal Reserve policies.

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The Australian dollar was able to resist a further attack on key support in the 0.9000 level against the dollar during the week and strengthened, even though there was strong resistance on approach to the 0.93 area. The currency was again undermined by concerns surrounding the Chinese economy following weaker than expected data which reinforced Chinese growth fears, but it recovered strongly from lows.

The latest domestic inflation data was marginally below expectations, but with a slightly firmer figure for core inflation which created some policy uncertainty, but there were still some expectations that the rate could be cut in August.

With important concerns surrounding the Chinese outlook, the net global and domestic economic trends are still likely to push the Australian dollar lower.

Canadian dollar:

The Canadian dollar was unable to strengthen through the 1.03 level against the US dollar early in the week and drifted weaker through the week as a whole, although ranges were narrower with no major domestic influences.

The latest retail sales data was stronger than expected with a 1.9% monthly increase which helped underpin the Canadian dollar and oil prices were still at elevated levels.
 
The Canadian dollar will find it difficult to make further significant progress as fundamentals and valuations will provide underlying US dollar support.

Indian rupee:

The rupee was able to strengthen during the week with a recovery to five-week highs beyond 59 against the US dollar. There was a generally weaker US currency which helped provide underlying support and risk appetite improved slightly.

The Reserve Bank of India continued to counter potential speculation against the rupee by restricting credit access which had some positive impact. There was still solid dollar buying by importers and underlying vulnerability in the local stock market which helped underpin the US currency.

The rupee has gained support following a generally weaker dollar. Underlying domestic and emerging-market vulnerabilities will limit the scope for recovery.

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The Hong Kong dollar was confined to very narrow ranges over the week and consolidated in the 7.7570 region against the US currency. The generally more dovish expectations surrounding Federal Reserve policies helped underpin the currency. Any widening of the Chinese yuan’s trading band would be likely to put some upward pressure on the Hong Kong dollar.

Short-term trends will tend to be dominated by China’s economic and financial concerns and stability will be the prime short-term official requisite for the currency.

Chinese yuan:

The Chinese yuan was slightly stronger during the week, although the ranges were relatively narrow with the currency settling around 6.1350 against the dollar. There was some speculation over an imminent widening of the trading band following the moves to partially liberalise interest rates.

The Chinese economic data was weaker than expected with an HSBC flash PMI reading of 47.7 which was an 11-month low. There were further concerns surrounding the growth outlook and the government suggested that growth around 7% was the lowest acceptable level. This increased speculation that there would be fresh efforts to stimulate the economy as fears over deteriorating credit conditions and rising bad debts continued to have an important negative impact.

Concerns surrounding the Chinese growth outlook will continue and there will be official reluctance to let the yuan gain ground as export growth will be essential.

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